LMSM 41 | Private Capital Raise

 

Fresh off a successful $10M real estate syndication that delivered a 30% return to investors, Frank and Ian are at it again. In this episode, we talk through the details of a real estate deal that will require a private capital raise of $4M+ in a short window. This episode was recorded before Frank and I negotiated terms so you can hear us working out the details as we go.

We pull back the curtain and share the details of a large real estate deal. In this episode:

  • The difference between a real estate speculator and an operator
  • The importance of buying at the right price
  • Finding deals where you can add value
  • Knowing the long-term prospects of your market
  • Promoting a real estate deal and raising capital
  • The power of a strong track record (successful deals beget more deals)

Watch the episode here:

Listen to the podcast here:

Raising $4,000,000 in 60 Days

Frankie has added another $5 million worth of real estate assets. I always feel like Danny Glover in the Lethal Weapon movies who wants to retire. Mel Gibson keeps dragging him back into danger. Frankie is bringing me along with him. We’re going to raise $4 million in private capital for an exciting real estate deal. We talk about how we’re going about thinking about it, what kind of assets they are, how we plan to go raise the money, how we plan to pay back the investors and what the actual schematics of the deal will look like. Also, what it’s like to be a real estate operator and what my role will be as a promoter.

We talked through this before Frank and I even agreed to terms of what our two roles would be in this real estate which makes us an interesting show and that we are forming the structure of what this next deal is going to look at. We hope you learn from it and we hope you like it and enjoy it. Feel free to shoot us some questions if you have some. If you are one of our longtime readers and you’ve not given us a five-star review on Apple it would mean the world to us. We’re trying to grow this thing and every little bit helps. If you know someone who would enjoy this podcast, please tell them about it.

Frankie, what’s going on in your world?

We’re finally in the headspace after this episode.

We could go a lot of different angles on this show, maybe persuasiveness, sales, customer service, loyalty, and branding. There’s a lot of different things that Frank has been hammering me with as I begged him to let me stop the show but we persevere. Frankie, you are working on your next big deal. We got an entire show on a $10 million deal that we worked together on that your team did an incredible job executing on.

We closed the deal in December of 2019 and then we raised $2 million in private money. We bought 75 houses then we went through and did all the value-add and everything like that. That was a 24-month commitment and we closed the deal in January of 2021. It was a thirteen-month deal with a pandemic in the middle of it. We had promised investors a 25% cash-on-cash return. The portfolio performance is 30% but there was a waterfall. Everybody who invested $1 got back $0.28 on their dollar in thirteen months. That was a quick overview.

We gave everyone their money back a year earlier than we said. It took thirteen months. We had told everyone 2 to 3 years for that 25%. That was a pleasant surprise that we’re able to send people checks in January 2021. Our investors are so excited. They were calling and thanking us. It made us feel a little nervous. Maybe we’re thinking that money wasn’t ever coming back or something.

One of our investors flew us to Chicago. We had bottles of wine and an incredible dinner in a closed restaurant that he owns. He was clearly happy to get his $250,000 back.

Your business not unlike all businesses, you have traditionally relied on outside sources for financing because of the sheer volume of deals that you do in a year is crazy. Typically, you’re looking at various mortgage lenders and portfolio lenders. You’ve worked with hard money lenders which are more short-term bridge financiers that will hit you with the user as terms almost because they need their money back relatively quick. You’ve used financing and now that you’ve done one syndication where you had invested providing a lot of the financing that closed in January 2021, you’re looking to do it again. Do you have a portfolio in mind already or you’re going to go out and find the deals?

We talk a lot about business in general, principles and practices on this show. What we talk mostly about is a combination of things from management to business startups and psychology. It’s more about management than it is about deals but it makes sense to take a quick step backwards. I am what is called a real estate investor. I’m in a mastermind group that I help run that’s for real estate investors. We are a segment of the audience. We are not realtors or builders. We’re known as investors. We’re most commonly seen as the people who run signs that say, “We buy your house fast in cash.”

At its core, my hub is we are direct-to-seller marketing advertisers. We look for distressed or underperforming real estate assets. That’s the core of my business. Most of the people who are hobbyists or most of the people who don’t take this to the next level stay there. Ian and I both work for Ryan Homes for years. I twelve years in there what I did is I learned how to develop, build and sell. I took all of those skills and I can compartmentalize them into this business. I didn’t want to have a one-legged stool.

In 2009 when I started this, I was working for a publicly traded company and they got destroyed because of the downturn. We went from 62 divisions to 29, our revenues got cut in half and they had $1 billion in the bank. My philosophy was, “I need to add protection. I need to have a four-legged stool.” My stool was wholesale, fix and flip, rentals and education. I figured as long as I could tell a compelling story and I spoke English, I could go to a place that spoke English and talk about this and I could collect a paycheck. That was at its earliest. I saw someone post on Facebook and they’re like, “What are you doing for inflation?” The answer is easy. I bought 300 houses several years ago because that’s the easiest way to fight inflation. I’ve been saying this since things were cheap but now years later, we have this.

LMSM 41 | Private Capital Raise

Private Capital Raise: The best way to combat inflation is not to own cash or assets because they go up during this time.

 

A great answer is, “The best way to combat inflation is to own shit.” Don’t own cash. Own assets because they go up in inflation.

It makes sense to start there with the business because I had a mindset to be different than my peers in this space. I come from the best-in-breed home builder who preached being conservative. I didn’t have $1 billion when I quit. Thankfully, I had some money. What I wanted to do is I want to not lose that money. I found assets that I could get in and out of. Worst case, I would break even and wouldn’t lose. What that became is the business that you see nowadays with nearly 40 employees and these bigger deals that we can chomp up. It all started with those small fundamentals. In those twelve years in, we can look way bigger stuff because we have the right fundamentals, people, team and process. We know what to say no to. The building that we’re going to talk about is a series of buildings. These are all existing buildings.

Before you get into that, I wanted to ask you this because there’s different parlance in your industry. I would consider you an operator. Are those two terms, investor and operator used interchangeably in groups that you run in? It’s important if you’re reading this and you’re thinking, “I’d like to get into real estate.” I consider most people that get into real estate as speculators. I don’t consider them as investors. They find a deal on the MLS. They buy it and hope they can sell it for more. Irrespective of fees, they hope they net a little in their pocket after taxes.

You’re far from that. The average person that doesn’t know what you do, that you are investor. I look at you almost like a builder, a construction company. You buy smart. If you bought poorly, you would never make any money. What makes you different than the average dude that can go buy a building and try to flip it is you add value to these buildings. You have a construction company, strong tenant management arm that can go raise rents and work with tenants to collect rents. These are things the average guy or girl on the street could not do because they would quickly get overwhelmed with phone calls and minutiae.

Most people in the world that are in this space know who a real estate agent is. If you look at the internet, there are people standing on the hood of $300,000 cars throwing $100 bills in the air, making it rain. In a lot of instances, that’s what a real estate investor is. To me, those people are frauds or like, “There is a way to make money in this business and there’s a way to make big money in this business,” but it’s the wrong side of capitalism in my opinion. If you’re going to be good at this business, you need to be an operator. This is a newer type of business. The reckless seller marketing and advertising have been around forever but it was never organized. It was one of the reasons that I picked to get in here.

The competition does not have my level of sophistication, education didn’t work at NVR like I did and didn’t have money. Most people come into this with no money down. That’s the speculative game. From 2008 through 2011, the market got compressed so much. There was so much inventory sitting there. Wall Street looked at it and said, “This is now a trade. I can go to Atlanta or Arizona and I can buy a physical asset for less than the parts to put it back together.”

In simple parlance, “I can go buy an existing home in a neighborhood for 60% of what it would cost me to go to Home Depot or Lowe’s and buy the material to build it.” There was value and because there was so much value or opportunity, people who didn’t need an immediate return like Wall Street got into the space. What happened is houses for rent became something that is now commoditized where it wasn’t in the past. This is relevant for this because in the old days, you didn’t have to be sophisticated and you could do well in this business. Now you must be an operator. If you aren’t an operator, you might get lucky but you’re going to get sniffed out by somebody else who’s figured this space out better than you have.

You can’t just be an investor. You have to be able to add value to the property.

You can be someone like before you’d quit your job, you would be perfect. I’ve got people that buy turnkey houses from us. They live in California and in expensive markets. Some people have $125,000 in their IRA. What they do is they buy a house from us that has an incredible return. It’s got a 20% cash-on-cash return. That is investing. Most of the people who sit in my seat are speculators. They’re trying to figure out how to take nothing and turn it into something. They’re trying to get something under contract and take it to the market. That’s at the core of the business. What we’ve done is we’ve gotten sophisticated on how do we find cash buyers and people who buy at the highest price. When we make the most money in is not even close. When we buy an asset that’s underappreciated or underutilized, we hold it, add value to it, stabilize it with a renter and capitalize on depreciation.

Explain stabilize. You have unstable and stable rent, but for you as an operator, take people behind the curtains of what phone calls are being made, how are people interacting with tenants and finding better tenants. Talk about how your team stabilizes rent.

There are several things you can do to stabilize. The first thing you have to do is you have to understand what’s happening on the property. Do you have a good or a bad resident? Are they taking care of the property? Coming out of the pandemic there are all these moratoriums on the eviction. You have to work with people that are in these units if they’re underperforming. What we notice most times is the people are running the property into the ground and they are not treating that property or that home like an asset. Instead, what they’re doing is they’re riding it hard and putting it away wet.

In some instances, we rarely buy houses with residents in them because getting them out is hard. What we try to do is buy something that was a tired landlord who’s not great at management. We get the property empty, and then we come back. The first thing we do is we stabilize the house and all define it. We make sure that the roof doesn’t leak, all the major systems work, it’s safe and attractive. What we do is we make sure it’s energy-efficient which you might not think about. We typically provide workforce housing which is hard to find in the market. It’s affordable or workforce housing.

You can't just be an investor. You also have to add value to the property. Click To Tweet

By going through and doing these things, we find residents who can’t find other places to live. What they do is they move into our properties and don’t move out because we treat them like great human beings. We treat them well. If there’s a problem, we service it and we give them a great asset to move into. From a business owner’s standpoint, turnover is your most expensive cost. If you do a good job upfront, it’s called CapEx or repairs, you move someone in then you get a stabilized rent with a signed lease. You then can take that property to a bank and get incredibly favorable terms then you sit on it.

It has three of that rent hitting. Especially when you buy a large portfolio, you look at all the houses and it’s inconsistent. You get a couple of months and that person moves out. It took two months to find them. A bank is going to look at a property like that and not going to want to lend to it. The same as they wouldn’t want to lend a mortgage to someone who seems like they’re always in and out of work. To get a mortgage, you need to prove that you’ve got a couple of years of consistent history of working especially if you’re self-employed. It’s the same with one of Frank’s properties. If he wants to go get debt on a portfolio of 100 homes and half of those homes only collect rent 4 or 5 months a year, if I’m a bank, I’m not that excited about lending you money. I’m not sure you’re going to have enough incoming to pay my principal interest, taxes and depreciation.

What happens in a lot of instances is this. You go to apply for a mortgage and they want to pull two things. They want to see your W-2 or how much you make and your credit score. In the commercial world, what they do is look at what’s called the rent roll. A rent roll is the answer key to how are you performing. It’s like a credit report, essentially. They look at the property and say, “Here’s the property. Here’s the rent collected. Here’s everything. How much do you spend on your mortgage? How much do you spend on taxes? How much do you spend on repairs?”

We have between 200 and 300, and manage 400 of these things. I got six people in my accounting department who put all these things in the spreadsheet so we can send it to banks. What we had to get good at is finding assets, then we had to get good at stabilizing them, putting people in them that would stay and collecting rents. This needs to be noted. During the pandemic, we collected $0.99, so we were super aggressive with working with our residents to help them pay their bills. They didn’t lose their house. I was having this conversation with my mom. There are all these moratoriums on mortgages. I have 300 mortgages. Guess how many of my banks called me and said, “Frank, don’t pay your mortgage this month. Go ahead and take advantage of the moratorium?”

I’m going to guess zero.

Exactly. I still had to pay my bills. What we did is we talked to our residents and said, “If you’re having problems, call or email us and tell us what the problem is.” The government printed a shitload of money and what we did is we got aggressive with PPPs, cares, rental relief and all these other things that came out. We said, “You don’t have the ability to do this. You need to go to work and keep your job. It’s hard for you but we have the ability to help you,” so we did. We didn’t want this debt to follow them around.

Eventually, they passed this law. We had our attorney draft a letter that said, “On behalf of the resident of this house, Cava, our company is going to come and help you get this money so you don’t have debts or you don’t get evicted.” We work with the residents and government. We did all of these things to perform well. This is going back to your question. Am I an investor? Yes. Am I a speculator? No, but I’m an operator. If you’re not an operator, you don’t get the most squeeze out of your juice or that piece of fruit. That’s what we do here. I’ve got great people who focus.

These are all expenses. A lot of times, I see realtors trying to do things on the cheap. If you’re going to do anything at scale, I don’t see how we could have done those 75 properties in the pandemic on the cheap because there are real expenses to your tenant management. When you go look at the granular level, you are reaching out to everybody. “How are you doing? Are you still employed? Can we help you? Is everything okay? We noticed you’re late on your payment. Did you know there’s a paid check protection program? Did you know that there are local grants for the city of Richmond? Could we give you some phone numbers?”

Your people were good at being proactive. The reason why we collected all of our rents wasn’t luck. It wasn’t because you happen to pick 75% of tenants. You were proactive and you were all over it. You were helping people figure out how to get through something like that. A speculator isn’t organized enough to go manage tenants. Out of everything I knew, you were good at construction but going through that project with you, what impressed me the most was your property management. Ultimately, the way we handled that portfolio was more important than any aspect of the organization, in my opinion. We didn’t put a lot of money into those properties because of the nature of COVID. We were going to blow out a lot of those and we ended up deciding not to so your construction, though important, it wasn’t as important as your property management.

They both were incredibly important. The permit office in Richmond shut down for almost three months. Wednesday, Thursday, and Friday after they opened, they drove around the city giving people pink slips if you were doing work without a permit. That was their way of helping the city out. We had to get so creative on, “We need to add a bath. We can’t do that. We can’t pull a permit. We got to figure out ways that we can get around this. Stabilize the asset.” We have to do all of these things without permits and not do it illegally, so we had to be creative. That was one.

We then get it stabilized and then it came down to getting a resident in there then it was like, “They’re in and now they lost their job. How do you collect?” This is a great business to be in because of the long-term wealth that can build and the options it can give you long-term. Real estate usually appreciates. Unless the tax code changes, you can also use depreciation. Those two things are going for you but you have to have the support team in place, maintenance, property management, construction or you’re going to get killed.

The sweet spot that you focus on are properties you can acquire for $50,000 to $100,000 that you can put some value-add in to stabilize and sell down the road for $120,000 to $200,000. That’s probably 80/20?

Private Capital Raise: If you’re going to be really good at real estate, you need to be an operator.

 

It’s close. We did that forever. We’ve been doing that for several years. We’ve gotten good at it and we have a track record. A few years ago, I did a few other things that are worth talking about. We buy in what’s called the path of progress. The path of progress could be a neighborhood or the next neighborhood. In a lot of instances, it’s 5 to 10 blocks away from where things are bustling. What we did is we got ahead of the path of progress. We went into areas where it hadn’t shown up yet but it wasn’t far away and we did a bunch of things. I bought some commercial buildings for cheap, $15 to $35 a foot. They’re not yet in the place where you want to do development. I bought a bunch of lots.

The Path Of Progress or POP are still places where you might get your rim stolen if you park your car long enough on the street. It’s not there yet. No one’s quite living there but you see the neighborhoods around it are starting to converge on it.

The first two examples in Richmond of the path in progress were Northside and Church Hill. Northside is harder to explain, so I’ll explain Church Hill. It has four borders. It’s got a river, Broad Street and a highway. The closer you were to Broad Street years ago, the better off you are. Four hundred blocks to Broad Street was good but the 500, 600 and 700 block wasn’t. About two years went by and the 600 block to Broad Street was good. What I said is, “Unless something major happens, 700, 800, 900 blocks are probably going to be good too but it’s going to take a while. We’ll buy those assets and hold on to them.” You might get your rim stolen but most likely not. It’s not quite that bad.

We’ve had a ton of stuff stolen, HVAC units and the whole thing. That’s a place where you hold on to the asset. You wait 2 or 3 years and the market comes up around you. Instead of having the nicest house on the block, you have the worst house on the block and then you go in, spend $100,000, sell it and you make a fortune. The other thing that’s cool about that is, the way the tax law is structured is that’s capital gains. Capital gains are taxed at less than ordinary income, so it’s not a matter of what you make but it’s what you keep. These things all work together.

It’s important to know that just about everyone in Congress owns real estate in some way. Every time you start hearing chatter and noise about real estate investors and owners are going to get taxed higher, I usually feel like it’s all garbage because the people making these laws own real estate.

Thankfully because it’s a sacred cow. This is relevant. You and I work for NVR. We got there a decade or so after they came out of bankruptcy. When did you start? I started in ‘98.

Late 2004 is when I moved to DC.

You started six years after me. The bankruptcy was still talked about a lot 7 or 8 years after it ended when I got there. What they taught me was to be conservative and the way to lose money is to buy raw land that you sit in entitlement for years and you’re going to have problems. What I noticed in 2015 and 2016 is there were one-off lots all around Richmond. A one-off lot is a vacant parcel of land with either trees or empty beer cans between a bunch of houses. These things would be on the 1,100-block when the 700-block was coming up.

I started buying lots for cheap, like $3,000, $5,000, $7,000. We own 150 of those. My average cost is less than $10,000 and I owe $200,000 on all of them. I continue to accumulate them because I was like, “These are cheap. They’re not in good areas now but they’re going to be in better areas. My company isn’t sophisticated enough now to capitalize on this but I’m going to hold those.” What we started to do was we bought some commercial stuff. We talked about this on our team call. We have 1301 N 30th St. If you go back to the tax record, you can find a picture where the chicken was $0.22 a pound. This building’s been around forever. What we’re going to do with it is we sat on it for years.

I’ve got a friend who’s also a developer and he called me up four times. He was like, “When are you going to do something with that piece of shit?” I’m like, “When you build more houses. I’m going to wait for you to do everything.” I bought this building for $37,000. I sat on it for four years and now what we’re going to do is we’re going to have 1,000 feet on the ground and then two apartments over it. It’s going to be mixed-use. There are beautiful houses in every direction. We own four of those. We also own this incredible church. We bought this church for $300,000. That’s 10,000 feet. If I want to put this thing on the market nowadays, I get between $1 million and $1.5 million for it.

How much did you pay for it?

$335,000 or $350,000.

The path to wealth in real estate is to be a sensible developer. Click To Tweet

It’s gotten tripled in value. Talk about why it’s tripled in value a little bit. When you bought it, it had some hair on it.

It still does. It had all kinds of issues. It had all this pigeon poop to a point where it was toxic. You couldn’t go in there without a mask. All this stucco was falling off. It was in terrible shape buy if you look at the asset, I bought it for less than $30 per foot. The numbers matter. At $30 a foot, you can’t build anything. That thing isn’t worth $200 a foot the way I bought it but it’s worth more than $30. That’s the inverted relationship that Wall Street saw why they poured into housing. I looked at this thing and I said, “It’s incredibly well located. It’s a monster. It’s 10,000 feet and I’m buying it for a discount but it’s zoned to church. I don’t know what to do with the church but I know how to convert it from a church into something else.” We hired an incredible architect.

What did you do with this asset? When did you buy this? I remember years ago you’re showing me this church.

We bought it in 2017.

You showed it to me before you even bought it.

To put it in perspective, I bought this before I was married and before I had kids. That’s the point of doing this. Speculators need to flip and turn things quickly. I’m an operator but also a developer. The path to wealth in real estate is to be a sensible developer. I want to have a low downside and I want to make sure I can mitigate my downside. You can’t build that thing for $30 a foot, so you can’t get hurt. If the market appreciates, great. If not, what are you going to lose? Very little.

What we did is we put debt on it, sat on it and waited. We went to the city and got what’s called a special use permit. That changes it from the church to what we want to do, which is to put a fifteen-unit apartment building in it. We hired this incredible architect who’s done some cool stuff in Richmond. I wanted to look at something between Venice Beach and New York. I want it to be grays, blacks, concrete and metal. I want to be a draw. I want it to be a place where people can go to apartments and live and enjoy it amongst other things that look different. I wanted to always draw younger people who want to be in the area and that’s what we hired.

We got it drawn, take the permits then, go back to the SUP board and say, “This is what we’re going to do.” That process took three years. This is dumb luck. In that time, the market has gone bananas. I thought it would go up but I didn’t know it would 3 or 4 times in value but what we did is we’ve stabilized this asset and we have blueprints that are approved by the city. We can do a few things. We have multiple exits. I can take my blueprints and sell them to somebody else and sell it 3, 4 or maybe 5 times what I bought it for and they would buy it or what I’m going to do is I’m going to develop it. I’m going to do all the work ourselves. We’re going to then rent it ourselves. We’re going to fifteen nice apartments. One of which is going to have a view of the city off the back that we might turn into an Airbnb.

In the old days with football, your quarterback threw the ball or handed off the ball and that was it. They came in with this thing where there’s more athletic person plays quarterback and that person does what’s called the RPO, it’s the Run-Pass Option. It makes the quarterback and the offense more dangerous and it’s harder for the defense to stop them because at the line of scrimmage, the quarterback can decide, “I can do 1 of 3 things with this. I can hand off the ball, throw the ball or run it myself.”

My business is built like that. I want to be an RPO quarterback. I want to be able to make decisions and have 3 or 4 possible decisions with every asset and that’s how we position these. I talked about that you could sell it, develop it, rent it and also turn it into rentals that are higher end. I could put 5 or 6 Airbnbs in here. It’s a little bit harder to deal with the management but it takes the rents way up. We have all kinds of win-win solutions.

You’ve got this church, blueprints and a path to the right permitting where you could add a lot of value. This church could go from $400,000 of cost to you to probably a total exit price of around $4 million. It’s almost 10X. How much investment and how much money would you had to put in to get?

Our basis will be something that $2.5 million half range. It’s going to be $2.5 million to $3 million and it’s worth $4 million.

LMSM 41 | Private Capital Raise

Private Capital Raise: If you’re not an operator, you don’t get the most squeeze out of your juice.

 

You’ve got these other two assets that are more commercial in nature than what you’ve worked with in the past. Not that you haven’t worked in commercial but not in your normal wheelhouse. Talk about that neighborhood, the Amazon across the street, the Topgolf, all of it.

If you said, “Explain your rental strategy to me,” and I had to sum it up. We find distressed or underperforming assets. We add value, charge a below-market rent and retain our residents. In a sentence, that’s our strategy. I have an interest in this corridor with more things under a contract that we’re closing on. We’re going to have two commercial assets in the path of progress that’s on the backside of the hottest neighborhood in Richmond. It’s fronted by 100,000 feet that Amazon rents a significant portion of and then there’s a Topgolf close by and then there are 1,100 apartments going in behind us. The path of progress is a little bit before where we are but it is surrounding us.

The reason I bought these buildings is that the pandemic had happened. A-class rents are getting hurt. A-class rent is your beautiful, brand new building in a city. It’s a skyscraper with gorgeous glass and metal. That’s an A-class building. C- and D-class are stuff that’s beaten up. It’s got a crappy old carpet. The building doesn’t look as good. There’s always a market for C and D-class because it’s cheap and that’s where people go when they’re starting. What we’re going to do is we’re going to take C and D class office space and we are going to give it an incredible facelift. We’re going to make it, if not A, B-plus in grade. We’re going to be flexible. We’re going to have spaces as big as 6,000 feet which is the office I’m going to move my company into, all the way down to 80 square feet. It can be rented by the day or the month.

What we’re going to do here is we’re going to provide an A or B-plus look at a C to a C-plus price. That’s going to give us an ability to take tenants, get them in quickly, have a little vacancy and you take a little bit off the top on the return but you treat the people great. They don’t leave. You give them flexibility. That is how you grow an asset quickly. Because I bought it low and I can do the construction myself, I can keep the cost down. I can charge less rent, still satisfy the banks and make a great return.

This one’s a little bit unique also. You have the potential to move all of your employees out of the office you’re in into this asset at a below-market rent for yourself. Also, that rent is going to stabilize the rent roll for that project making it easier to get financing in a couple of years.

Without slides and showing you this stuff, it’s granular. There’s also a critical path that’s important to talk about. When you buy assets like this, you have to understand what are you walking into. We’ve got two separate buildings. There is one tenant in one of the buildings who’s a great tenant. They’re paying very close to the market rate and they’ve got a lease that goes for about five more years. I’m not touching it. They’re a great tenant. It’s close enough to market. They’re awesome. Leave them there. Behind them are two spaces. What we’re going to do with those two spaces is clean them out, take them to the market, see what the market wants and then build it based upon what the market tells us. That’s one building.

The second building that I’m going to move into is another one that’s perfect for us. It’s in a floodplain. That basement was flooded out. This property never went on the market. A realtor called me up and said, “This is for you. It’s perfect. I want to look at it with you in two days.” As soon as I walked in, I was like, “This is perfect.” The basement has a grade problem, which means the water flows into the building to the river. The first thing we’re going to do is we site survey it and we’re going to drop the grade on the parking lot. We’re going to prevent water from coming in. We’re going to fix the basement. Within 60 days of owning this, the parking lot will be fixed and the basement will be stabilized, new construction, and done.

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We’re going to charge $14.50 afoot, which is cheap for a brand new renovated space. We’re going to move people in immediately. Immediately, I have a tenant that’s already paying. I got the people behind him in the other building that will get that fixed up. I’ll have the basement done, then going to work from the top down of that building and start the renovations. The process there is if I do it this way, I’m collecting rents, getting the best of all things happening at the same time, maximizing my return while mitigating my risk and I’m able to satisfy all the banks. That’s how I’m going to put this deal together.

How are you going to finance all of these assets? How much do you need to capitalize? You talked about putting $2 million into this church. You got $400,000 into it. How much are the two Westwood properties?

The two Westwood properties are $1.7 million to purchase. They’re going to cost $2.5 million to renovate. When they’re done, they’re going to be worth over $5 million. I bought the church for $350,000. I’ve carried it. I’ve done a bunch of permitting and architects. We’re into it for $850,000. Ian and I are doing a raise. We’re raising $4.5 million and then we’re also going to utilize banks but we’re going to raise the money first so we can get everything closed and everything’s done. We don’t have to worry about the banks. We stabilize the properties. What we will do is we will then take it to banks, get incredible rates and then pay back the investor. We’re going to set this up to be a three-year raise. We can get into the details. It’s fun.

We are going to get into that. We did one big syndication already where it was straightforward. You put cash in. We had debt on an LLC. You were the management company. I was the manager of the LLC. It’s simple. You give a return at the end. Whatever cash is left after you’ve exited everything and spent, you give back to your investors. This one is a little bit different. There are going to be Class-A and Class-B shares in this entity.

I find this a unique and fascinating model. The goal is to use investor money to stabilize and improve the assets to where a bank will give you great terms and you can give your investors’ money back while letting them keeps some of the upsides in however long we want to hold it. As an investor, it’s a cool model. If I give $100,000, I’m getting distributions from Frank until he gives me that money back. As soon as Frank can go and get $5 million of debt at great terms because people have been paying their rent, I get my $100,000 back but I remain a percent equity investor in the assets over ten years even though I got all my principal back. Anything that happens after I get my principal back, in essence, my return is infinite because I already have my money back.

I’m a huge proponent of masterminds. I have a relationship with a mastermind that has been great to me. There’s a gentleman that comes to this mastermind who’s a single-family home investor and he wasn’t good at it. He said, “Screw it. I’m not doing this anymore. I’m getting into the commercial.” He got into the commercial. Ian knows him. His name is Tim Bratz. He’s a great dude.

If you’re a real estate guy, he’s a great guy to follow. Tim Bratz. Even on his social media, he talks a lot about how he runs his business. He’s a fantastic guy.

He gives a lot away for free and he explains it. This is his phrase that I love, “Wealth is like sunshine. There’s enough to go around for everybody.” Instead of having a pessimistic attitude, he has an opportunistic attitude. What he does with his deals is he structures them the exact way I’m structuring this deal. He brings in the investor. He pays an above-average coupon, a return during the stabilization. When everything is stabilized and then the money is paid back, you get to stay in the deal. You get to get some of the winnings. You have none of the risks, have all of the upsides and it’s proportionate. You do get some upside and get your money back.

Once you get your money back, it’s my hope and his hopes that you say, “That was incredible. What else can I invest in?” You’re continuing to get checks over time from us. You’re taking your money and then redeploying it. Let’s say you had to raise $100 million in a decade. If you do it this way and you can repay it and do turns every 2 or 3 years, you can raise a third as much and you have a group of raving fans who want to reinvest with you because they’ve seen you perform. They understand that. They give you the latitude to run your business. It’s one of the reasons Ian and I are doing this. All the investors that we work with last time are in again this time because we communicated well, we did what we said and we were better than we anticipated. That’s the goal here.

Also, for me, a term in any business but as a real estate investor is I’m acting as a promoter. All a promoter does is raise money. I acted as a promoter with Keep, which is the technology company that we’ve talked about. I went out for David and raised the money. I called people I knew. I had a perspective, information, marketing materials and I raised money. I did the same with Frank. I’ve promoted my deals which are collision centers, equipment rental companies, large commercial deals.

As a promoter, what I always ask Frank when I’m going to go ask friends about their money and put my investment capital is, “What happens if things go wrong? How long is my capital tied up? How long am I putting people’s money at risk?” What I like about this deal is it’s a long-term hold for Frank. We’re looking at these three assets. This church, we’d like to hold this thing for ten years. We’d like to own these assets by the Topgolf in the Amazon. Because of what Frank talked about, it’s in the path of progress. The path of progress is going to take a decade for it to see itself out.

Sometimes when you go take an investor’s money, there’s a lot of pressure on you to go give it back right away. There is no pressure because we are planning to give everyone their money back in three years if we can. As fast as we can get the rent-stabilized and put debt on it, we’re going to give everyone their money back. For me, I can go get the same group of investors to capitalize and fund 3 or 4 of Frank’s deals over the next 10 or 12 years. They keep getting their money back every three years. I don’t have to keep asking him for another $100,000. We’ll give them their $100,000 back and I’ll say, “Do you want to spend that on something else because we got another $4 million we’re raising?”

LMSM 41 | Private Capital Raise

Private Capital Raise: Capital gains are taxed less than ordinary income. It’s not a matter of what you make but what you keep.

 

For them, they get some of their money back right there but they also stay owners in those four projects. That $100,000 can get them equity in 4 or 5 deals in 10 or12 years, which is incredible. Everything in business is about the velocity of money. “How fast can I turn? What are my turns on cash?” The way Frank is proposing this is even though your equity stake gets a little bit smaller after you’ve been given your capital back, which makes a lot of sense because you have none of the risks, once you get your capital back, you might still own an equity stake for another eight years.

If Frank’s deal goes to zero and he goes bankrupt, you have your capital back. You have no risk. There is no way that we can come back and say, “Give us some of that back.” That’s not the deal. The deal is you get your capital back in three years, you retain an equity stake and some percentage of the rents for the next 7 to 8 years, which for me as a promoter, it feels easy to go out and talk to people about it. It’s also a reason why I’m going to put a significant chunk of my capital into this deal because I feel like it is a safe deal.

I do want to talk about safety. One, Frank is a conservative person who was raised in a conservative household whose first job was with the most conservative company in the real estate industry because they went through bankruptcy. Everyone who ran that company was conservative. Everything Frank’s ever done has been about, “First do no harm. First, lose no money.” I know that whenever Frank brings a deal to me, he has a strong margin of safety in it and a wide moat. The other piece of the safety for this to me is the time in which my capital is going to be out is limited by the nature of how quickly we can put debt on the deal. Frank’s relative confidence that he can get the rent roll stabilized quickly. He’s done that many times over a decade that I feel confident he has the staff that can do that quickly and competently.

The other thing I’m doing here is I’m telling the investors, “Three years.” If you’re an investor and you’re reading this, my goal is to get you your money back sooner than three years. I can do it in 12 to 15 months. 12 to 18 months is my goal. Think about that. In 12 to 18 months, I exceed expectations. I do what we say we’re going to do. The rents that I have projected here are conservative rents for the nowadays’ market with no appreciation. My debt service coverage ratio, which is a complicated way to say, “Are you collecting enough rent to pay all your bills?” A bank wants 1.2 to 1.25.

I’m going to get granular but I’m going to explain it quickly. If all your expenses are $10,000 a month, the bank wants you to collect 1.25 times that. $12,500 to satisfy that $10,000. The reason they want you to do that is you might have a vacancy, you might have problems. It can fall off. They want a debt service coverage ratio of close to 1 to 5. This portfolio has conservative numbers, has a debt service coverage ratio between 1.5 and 1.75 using conservative numbers. When I have everything rented and if I take a couple of stretches where I do some Airbnbs and I charge a little bit more for rent, it goes up.

We’ve got a margin of safety. This thing covers 57% occupied. We only have to get to 57% of the market. These are things that you look at. Can we not lose money? Number one, we can get into a position quickly where we breakeven to better. Number two, is there winning on the upside of that? After we pay the investor’s money back because it’s stabilized, is there a portion of wins? Yes. This is the RPO quarterback piece. What do we do in the future? Years from now, the market goes bananas and it’s like, “We should sell this thing because we thought it was going to be worth $7 million and it’s worth $12 million. Let’s not be pigs like we did with the RVA deal. Let’s take that money and move into something else,” or we could redevelop it, go vertical, get the blueprints developed and then sell it to somebody else and they can go vertical.

What we’ve got is we can do nothing to collect rents. We could redevelop, get it zoned and permit and sell it or do nothing. You got all of these incredible options. Ian’s going to put in a bunch of money. That money is going to hopefully be in another deal with me. He’s going to get a piece every quarter. This is worth talking about too. Our attorney has drafted this and was like, “We’ll pay annually or every half year.” We’re like, “No. We want you to get winnings every quarter. We’re going to give you a check every single quarter, so you remember that we’re doing what we said we’re going to do or performing well.” Ian’s going to write a cool little couple of paragraphs and say, “This is where the deals at.” There’s a visceral connection.

For an investor, what we’re going to ask for is a minimum of $100,000. That investment is going to get you an 8% preferred dividend. All that means is that’s a floor on what you’re going to get paid. If you put in $100,000, that means you’re going to get $8,000 a year in payments of $2,000 every quarter. You get that until we give you your capital back, which is when we refinance it. Let’s say you hold this for two years. You’ve made $8,000 a year. You’ve made $16,000. You now have your $100,000 back. You’re going to continue to get a small percentage of the rent a year. It might be smaller, $2,000 a year with no capital invested. You’re back and spending whatever. You’re still getting checks. It’s almost like having worked for Ford and you kept getting a pension for years afterward even though you’re no longer working or have your capital invested. In the end, when we sell, you still own and retain a percentage of the equity.

At that point, you may get another $15,000, $18,000, $20,000 with no capital still invested. That could be 5, 7, 4, 10 years down the road. You’ll still get that piece and have invested the $100,000 somewhere else. Cash on cash, depending on when you exit, you can make 30%, 35%, or maybe more on it. The fascinating part of this is you only have your capital at risk for 1 or 2 years of a long-term investment that you still get that return on.

I’ve got a guy that started working for me. He used to work for Ian. Ian called me up and he’s like, “This kid is incredible.” He found me through the podcast. He liked what we were doing. He’s in my market. On his first day, I brought him in and I said, “You’re going to sit in a bunch of meetings and watch me make the sausage. I’m then going to send you out in your job and give you two days to see what I do under the hood.” He’s like, “We do deals like this all the time.” I’m like, “Now you’re in the room where we make the deals.” This is the hard part. Real estate is the easy part. I got all the people. I got everything.

I’ve got to call my buddy up and say, “I want to raise some money.” I’ve got to bring him a structure of a deal that makes sense or he can get excited about, can understand, can tell somebody else about it. He can pitch it to them in a comprehensible way. They can ask questions and he can answer them. When you start with something like this, you start with all of these ideas and you whittle it. I believe wholeheartedly in real estate that these are good real estate assets. These aren’t properties. These are assets. To get the deal done, you need to be able to show people that this deal makes sense for these reasons. What is your collateral? What is your process? What is the payment they get? How soon? What’s the upside?

What if a bad recession happens? How are you going to monetize it? How do we stay afloat? What are the chances of my dollars going to zero?

Communication builds relationships over time. Click To Tweet

What is critical is sometimes you leave things on the cutting room floor. You say, “This is a deal that we can bring to market, that people can get behind, that they can support and that makes sense.” We were going to do a bunch of other collateral and we’re like, “We’re going to simplify this.” In addition to that, Ian said, “Why don’t I go raise debt? When I start getting double-digits, if I’m paying 10%, 12% for money, I don’t need to give you equity. There’s no reason. That’s high enough on debt. I do a debt deal. At this number, I want to do more deals like this. I want to take the eight people who invest in our last deal and make it sixteen. We got eight raving fans.” Let’s make it 16 or 20 raving fans who are thrilled. They get their money back. That was easy. They continue to get checks. Even better, “I want to do another deal with you.”

Ian and I both said this multiple times. That’s the long-term strategy. That is the play. Ian finished a deal with one of his collision centers. A bunch of people getting a bunch of money. He sent me a text that he got $4 million wired into his account while he’s on his bicycle. That’s it. We’ve got people who like and understand what we do. People want to put their money in places where they can get a good return and they know it’s safe.

The reason why we wanted to talk about this is that it’s something the two of us are working on. It’s big. We’re making it up as we go. We have a note, a term sheet of PowerPoint. Frank sent it to me. He’s revised it three times. I’m going to retype a lot of it. I’m going to be putting it in front of my attorney to look at it because we’re making up the terms. It’s like, “Ian, how do I make this sweet enough to make you go out?”

I was joking with Frank that he’s always sliding into home headfirst. The dude got a lot going on. It’s like, “Can we get some of that money in two weeks?” We’re trying to figure out how to get some of that capital. How do I give him some of my capital to tide him over for a bit? How quickly can we go raise $4.5 million in total? How much is Frank going to raise? How much am I going to raise? What is Frank’s take? What is my take as a promoter? What is my take as a Class-B shareholder? All those things, we’re figuring out how we make it work.

More than anything, the important piece that Frank touched on is I don’t promote something that I don’t put my own money into, at least I haven’t so far. If I call anyone, I always say, “My money is in this. Here’s why I decided to invest in it.” I would never go raise money for a deal that Frank brought to me that I said, “I want to get some fees for raising money. I don’t want to put my own money into the deal. That’s too hairy.” Everything I’ve ever raised money for my cash has been into it more than any other investor I asked. It was important for Frank to get me comfortable with the way the deal is structured. Now it’s my job to go out with Frank and roadshow this and go raise the capital and get it closed. It’s on Frank to execute like he always does.

None of this stuff is easy. We’re working back and forth with different attorneys. The sausage is made like this. Ian and I need to be incredibly comfortable with what the two of us are going to do, how it’s written. It needs to feel bulletproof for us. We don’t always agree. We have to get to a point where we’re on a plane where we now both agree. I learned this lesson. I used to pick all my selections on my houses.

Someone will come up to the house and ask the realtor, “Why is the siding yellow?” I don’t know. It was a dumb shit decision. What I did instead is I took the selection sheet to the realtor and I said, “What do you think of these selections?” She goes, “Why is this yellow?” I go, “What color would you like it to be?” She’s like, “I would like to be gray.” I go, “We’ll paint it gray.” Someone comes up to her and says, “Why is this gray?” She goes, “I picked it.” That’s what Ian and I are doing. We’re locking in our commitment to each other and our understanding of the deal and we’re on the same page.

We have arguments. We disagree with things maybe. That’s okay. We’re starting on the same sheet of music. If someone asked me a question, I would say, “Ian vetted this.” If someone asked Ian a question, he’d say, “Frank vetted this. He feels comfortable for these reasons.” Universally, we can then bring it to market like he feels comfortable with everything David’s doing at Keep. Every decision, he’s not in on. On a lot of them, he’s there. He’s checkpointing. That’s how you do this stuff. You have to get to how do we get a deal done? How do we make people comfortable? I’m excited about taking Ian’s money into this deal. I’m excited to give him a great return. I’m excited to pay him back and for him to call me up and say, “Frankie, what’s next?” That is how you build something with scale.

It’s important to state the importance of relationships when you’re going through something like this. Before any of the subscription agreements, operating agreements were written before I signed anything about my shares, I wired $50,000 to David because the Keep account was getting a little bit low. To that point, David had funded it all himself with cash. I was sold, was in and doing it. Am I saying you should do that with someone you’ve never worked with? I’m not saying that. I straight up Venmo David $50,000 to keep the account going because we were paying engineers. That ended up becoming so then when I did put the rest of my investment in, I shortchange to $50,000 and we were good. He’s my homie. That’s one of my best friends. I’ve known him for over twenty years. I know his integrity. We’ve worked on a lot of deals.

The same thing here with Frank. I’m like, “Frank, you’re asking me to go raise $4.5 million in two weeks. To be realistic, what do you need to survive? You got to give me 60 days because it’s too much pressure on people. You’re asking for it.” He gave me a number and I laughed. I’m like, “Why didn’t you say that? I’ll Venmo you that.” We laughed. That’s the truth. Our lawyers are going to talk. We’re going to work out some language. Is there any way Frank and I are going to get into a stalemate and screw each other? No. He’s my brother.

I’ve worked with him long enough where I trust him and he trusts me. I will wire him some money because I know we’re going to figure this out. It’s never going to come to a place where we can’t figure it out. I can’t overstate the importance of trust and relationships in business, especially when you get into finances this high. More than anything you value, find people that you trust. Deals happen faster and you work through them more when you have trust and lawyers don’t end up blowing them up for you.

We were talking at the beginning about direct seller marketing and advertising and you started to talk about different terms with cash. I’ve been in the business for many years. In that time, I’ve gotten more sophisticated. I can go to banks, bond offering and these things. I didn’t use to go to Ian for money. Ian and I are two good friends. I would never want to take his money in the beginning because I wasn’t sure enough of the business.

LMSM 41 | Private Capital Raise

Private Capital Raise: Just about everyone in Congress owns real estate in some way. Every time you hear chatter about real estate investors being taxed higher, it usually just garbage.

 

Even if it was an organization either.

It was different. It was too risky to borrow money from you. Nowadays, if this thing goes tits-up, as we like to say, I’ll refinance something else. I’ll figure out how to get everybody paid back. There’s no way this isn’t going to work. In the beginning, you don’t have that ability. What you do have is you find a couple of people who work with you and work with you well and believe in you. You usually pay for it through the nose. However, I have had several investors that I’ve worked with. There’s one in particular where I’ve borrowed somewhere in the neighborhood of $50 million to $75 million from this one guy.

The critical thing is to talk. If you’re not going to hit a goal, if something is going to be missed, you call them ahead, “An FYI, this thing is moving a little slower than I thought. It’s not going to be this month. It’ll probably be in six. Is that okay?” You always communicate. One of the reasons I love Ian on these deals is because he’s a great writer. He can put something together that’s succinct and gives a summary of where we are. Communication with people is critical when you have their money. The relationships are big. Communication is what builds that relationship over time.

I would agree with all that. We are recording this on June 16, 2021. By June 30, 2021, we will have funded the first chunk of this. Hopefully, by mid-August 2021, we have the rest of the funding done. Maybe late August 2021, I’ll fund Frank enough where he’s not sweating it too much. By then, we’ll have worked out all of the legal ease. We’ll have put together a good perspective for investors, a good marketing pitch. I already have made my list of 30 people that I’m going to contact about this deal and who I’m going to talk to. I’ve estimated what they’re going to put in. I’m going to be disappointed with some. I’m going to be pleasantly surprised that others say they want to put more in. That’s the way it goes and that’s cool.

The goal is that we have funded this then it’s back to making sure that we execute. That’s always what it comes down to with investment. If you want to raise money, you do a good job on the one that you raised last time. You then go back and talk to him about a 2nd, 3rd and 4th ride. I feel confident we’re going to figure out a way to give everyone their money back with a nice return on this one.

The other critical thing is we’re lined up to go. We’re closing this deal. I got to move back to $630,000. We’re closing $630,000. We need some cash, $630,000. We talked about that. I can’t pull a permit until I close but I’ve done everything I can on my permit. The first thing I’m doing is regrading that driveway. Everyone’s going to find out within twelve hours of me taking ownership of that building that we’re doing the driveway. We’re going to give them notice.

Within a week, the driveway is getting ripped up and we’re going. We are loaded for bear. We are ready to rock. You don’t want to show up and say, “What’s our plan?” You got people’s money on the line. You made commitments. You need to be organized when you go into these things. The other thing that’s incredible for me is if I have a problem or a good news, I call in Ian. He’ll summarize it and write it. I get to go do what I’m good at, manage my team, make sure that we perform and operate and we then deliver. That’s what a partnership is. We all have lanes. Let’s get in our lanes and let’s go.

This is Frank’s business. Frank lives this 50 hours a week or more. This is what he does. I have multiple things that I work on. For me, this is a way that I can work with Frank where he knows he can’t have all of my time but he gets a piece of my time. We work together on a project and I can continue to work on the other things I’m working on like our tech company and my consulting business where I’m lamenting to Frank that it’s starting to grow faster than I’m ready for. He’s telling me to chill out. I’ve got a lot of different things going. Outside of this podcast, this is a fun way that he and I can keep working on projects together. That’s all I got.

I said, “Be cool.”

That’s a fantastic close. It’s good seeing you.

It’s always a pleasure.

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